Can a General Partner Also Be a Limited Partner?
Examine the legal and financial dynamics when one partner holds both active management and passive capital interests within a single limited partnership.
A limited partnership is a business structure requiring at least one general partner (GP) to manage the business and at least one limited partner (LP) who is a passive investor. The GP actively runs the company and makes operational decisions, while the LP contributes capital without participating in management. It is possible for one individual to hold both of these distinct roles within the same partnership.
Understanding the Dual Capacity in a Partnership
An individual can legally serve as both a general partner and a limited partner within the same limited partnership, a structure permitted under most state laws based on the Revised Uniform Limited Partnership Act (RULPA). This allows a managing partner to also make a significant capital investment separate from their initial contribution.
This situation often arises when a founding partner wishes to invest personal funds into the partnership. By also holding an LP interest, that partner can receive returns on this additional capital, separating their management compensation from the return on their passive investment.
Impact on Personal Liability
Holding an interest as a limited partner does not shield an individual from the unlimited personal liability that comes with their role as a general partner. A general partner is personally responsible for all the debts, obligations, and legal liabilities of the partnership, which can extend to all of their personal assets.
The comprehensive liability attached to the GP role legally supersedes any protection that the LP interest would otherwise offer. If the partnership cannot meet its financial obligations, creditors can pursue the personal assets of the general partner. The law views the person through their highest degree of responsibility, which is that of the general partner.
Defining Roles in the Partnership Agreement
The partnership agreement is the governing document for a dual-role situation. This legal contract must clearly delineate the separate rights, responsibilities, and financial interests for the GP and LP roles. The agreement must specify the separate capital contributions for each interest and detail how profits and losses are allocated. For instance, the GP interest might receive guaranteed payments for management services, treated as ordinary income under Internal Revenue Code Section 707.
In contrast, the return on the LP interest is based on its proportional share of the partnership’s profits and is not guaranteed. The agreement must also define the different distribution rights for each class of interest. Finally, the document should state that all management authority is derived exclusively from the individual’s capacity as a general partner, not from their limited partner status.